Being a collection of thoughts, observations, comments, opinions and views on investing--especially for the long term.
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Friday, February 04, 2005

Do the "Experts" Know Better?

Interest rates are at a 40-year low and may be headed even lower, despite the government's massive budget deficit, the U.S. trade deficit, military spending in Iraq, etc. The 10-year Treasury rallied 10 b.p. today to yield 4.06% on news that employment is weaker than expected, making it less likely that the Fed will continue to raise rates. This also led to a rally in the stock market, defying conventional logic that bad news about the economy is also bad for the stock market.

Everyone I know tells me that interest rates will probably head up this year. A measure of just how skewed market opinion on interest rates is comes from an article I saw recently, citing results of a survey of financial market professionals who watch, analyze and forecast interest rates. Some 46 out of 47 of these so-called "experts" indicate that interest rates will rise this year. The article also mentioned that these experts as a group have a very poor track record over the past 20 years, being right far less than half the time.

From a contrarian point of view, when such an overwhelming consensus develops in one direction, the best thing to do is to run the opposite way: When consensus says interest rates are rising, they will most likely fall. I am not necessarily a contrarian but I think that there is some merit to reversion-to-the-mean theories of human behavior. When investors and traders all sell Treasuries based on predictions of rising interest rates, there comes a point when there is nobody left to sell. At such a time, the markets rise and interest rates fall.

Interestingly, we may be in this situation today. In my opinion, the stock market looks oversold and interest rates could have further to fall.